CORPORATE CONDUCT: THE OVERVIEW

By KURT EICHENWALD

Published: July 9, 2004

HOUSTON, July 8—
Setting the stage for a high-stakes legal battle with government prosecutors, Kenneth L. Lay, the former chairman and chief executive of Enron, pleaded not guilty on Thursday to charges that he engaged in a conspiracy to deceive investors and employees about the company's financial troubles just before it collapsed.

Mr. Lay was charged with 11 felonies, including conspiracy, making misleading statements, wire fraud, bank fraud and securities fraud, in a criminal indictment handed up by a grand jury Wednesday and unsealed Thursday morning. The Securities and Exchange Commission also filed a civil complaint against him, seeking more than $90 million in fines and penalties.

Perhaps the most surprising aspect of the sweeping 65-page indictment is what the government does not charge.

There are no allegations that he knew of the fraudulent partnership dealings that hid the extent of the company's debt and contributed to its downfall. And while Mr. Lay's sales of stock in the months leading up to Enron's bankruptcy filing in December 2001 have been a primary focus of the investigation, no criminal charges contend that the sales themselves were improper.

In the S.E.C.'s civil case, however, which requires a lower standard of proof, the government does accuse Mr. Lay of disposing of his stock at prices that did not reflect Enron's true, much lower value. While public attention on Thursday was devoted mostly to Mr. Lay, perhaps the most explosive information in the indictment had nothing to do with him.

The government revealed that it has obtained written evidence that prosecutors contend shows that two other senior Enron officers entered into an illegal agreement, initialed by them and known as Global Galactic, to manipulate the company's reported earnings through bogus sales of company assets.

The government in the past has raised allegations about the existence of such an agreement, which would be a violation of securities law. But now, with what the indictment says is proof of a written agreement, prosecutors appear to have obtained significant evidence of one of their most damning allegations, though there is no evidence at this time linking the agreement to Mr. Lay.

After entering his plea before United States Magistrate Judge Mary Milloy in Federal District Court here, Mr. Lay was released on a $500,000 unsecured bond. Soon afterward, he appeared at a news conference -- an exceedingly unusual move for a defendant in a criminal case -- and he steadfastly denied committing any crimes during his years at Enron. Both he and his lawyers said they were pressing for the case to go to court as soon as possible, and planned to invoke the Speedy Trial Act, which would require that the trial start within 70 days.

''I firmly reject any notion that I engaged in any wrongful or criminal activity,'' Mr. Lay said at the news conference. ''Not only are we ready to go to trial, but we are anxious to prove my innocence.''

Mr. Lay was added as a defendant to the indictment brought this year against Jeffrey K. Skilling, who succeeded Mr. Lay as Enron's chief executive from February to August 2001 before Mr. Lay reassumed the title, and Richard Causey, the former chief accounting officer of Enron. Mr. Lay is the 31st person to be charged with committing crimes involving the company.

Both Mr. Skilling and Mr. Causey were accused of engaging in a conspiracy to manipulate Enron's earnings and other financial results, in large part through the use of a group of off-the-books partnerships created by Andrew S. Fastow, Enron's former chief financial officer. Mr. Fastow has pleaded guilty to fraud, agreed to cooperate with the government and faces 10 years in prison.

Prosecutors portrayed Mr. Lay as the last link in a conspiracy that began with Mr. Skilling and Mr. Causey in 1999. But, they said, Mr. Lay became an active member of the conspiracy in August 2001 after Mr. Skilling's abrupt resignation.

''Ken Lay took the helm of the criminal scheme,'' said Andrew Weissmann, head of the Justice Department's Enron Task Force.

In the end, of the 11 charges against Mr. Lay, 4 involve solely actions he took with banks related to his personal finances, rather than with activities involving Enron. Six of the charges involve what the government says were false statements he made in calls with securities analysts or credit rating agencies, or in discussions with employees. And one is a generalized conspiracy count.

It is the conspiracy count that contains the most direct accusations that Mr. Lay acted to disguise Enron's deteriorating finances in the fall of 2001. This involves the largest accounting issue raised by the indictment: decisions made at that time on how to deal with changes in the accounting rules that could have required Enron to reduce its earnings in the first quarter of 2002 by what the government says would have been as much as $700 million.

While Enron was bankrupt before the time came to report those earnings, the company announced the expected effect of that change, which altered the accounting for acquired intangible assets known as good will and did not include the $700 million effect involving Wessex Water Services.

Wessex was owned by an Enron division called Azurix, which unsuccessfully pursued an effort to push the company into the international water business.

According to the indictment, the $700 million of good will carried by Wessex would have to be charged against earnings unless Enron decided to pursue a strategy to expand the water business.